Tackling climate change and growing the economy

I want to provide you with an overview of the OECD activities on climate change and the main policy conclusions of our work.

Are developed country commitments sufficient?

Recent pledges to cut GHG emissions by so many countries are good news. Many of these targets are quite ambitious.

But they are not enough. We estimate that declared targets by or industrialised countries add up to an 18% reduction in their emissions by 2020 from 1990 levels. This falls short of the 25 to 40% reduction that scientists say is needed from rich countries to keep the temperature rise to 2°C. They need to go further.

Of course, developed countries cannot solve climate change alone. Even if advanced economies brought their current emissions to zero by 2050, this would be fully out-weighed by new emissions coming from emerging economies.

That’s not to lay blame on them. Some emerging and developing countries are making an effort and have set their own targets. Together, we estimate that this could reduce their baseline emissions by about 8% in 2020.

While collectively these pledges move us closer to the emissions reductions needed to achieve ambitious climate goals, more effort is needed by all. Leadership has to come from developed countries, both to deliver and expand on their own commitments and to spur action globally, through financing and technology support.

Financing is key encourage more countries to go further in reducing their emissions. It needs to be scaled up.

Where will the new scaled-up financing come from?

But where will we find these new funds?

We have some practical policy proposals to suggest. First, we need a strong focus on market-based instruments -- such as carbon taxes and emissions trading schemes. Our analysis shows that industrialised countries could raise revenues of as much as 2.5% of GDP by 2020, if they used carbon taxes or auctioned permits to achieve a 20% reduction in emissions. While there is likely to be many competing uses for these these revenues, some could be used to finance climate change action in developing countries.

This can be complemented by private investment. Carbon markets and flexible initiative such as an improved Clean Development Mechanism and sectoral crediting mechanisms would provide financing for low-carbon investment, particularly in developing countries. They would also lower the cost of achieving agreed emissions reduction targets.

How much does ambitious mitigation action cost?

To contain costs, we need ambitious action to build a global carbon market and we need it now. It would cost only about one-tenth of a percentage point of world GDP growth per year between 2012 and 2050 to keep GHG concentrations at safe levels. It is an insurance policy against the risks of an unknown world with potentially catastrophic consequences.

Cumulatively, this amounts to a cost of only about 4% of world GDP in 2050 (see chart below). This should be put in perspective. Under our business as usual scenario, GDP is expected to grow 250% by 2050: the cost is quite small by comparison.

Ambitious action to reduce GHG emissions is affordable...

What mitigation policies are needed?

But we need to keep the cost of action low. This means that all large emitters must co operate in global action, and that we need to put a price on carbon. And that we should seize the win-win policies that would help fight climate change and improve welfare at the same time. Remove subsidies to fossil fuel energy consumption or production, which is a de facto reward for carbon emissions is one of those “low hanging fruits”. Recent OECD and IEA analysis shows that removing fossil fuel subsidies in emerging economies and developing countries could reduce global GHG emissions by 10% in 2050 compared to business-as-usual, while improving welfare – green and growth working hand in hand.

Removing energy subsidies can reduce GHG emissions by over 10%...

What about competitiveness impacts?

So, why don’t we have more ambitious targets on the table?

There are still countries that fear that carbon taxes or cap-and-trade schemes might hurt the competitiveness of their industries, if their foreign competitors do not have to curb emissions. Some want to impose taxes on imports from countries that do not adopt stringent greenhouse gas targets.

Our analysis says that this is a bad idea. Border taxes do little to address competitiveness impacts are expensive for both the country implementing them and for their trading partners, and could lead to trade friction.

Our analysis also shows that fears of “carbon leakage” are exaggerated. Unless only a few countries take action against climate change, carbon leakage rates (the percentage of their emission reductions likely to be offset by emission increases in other countries) are almost negligible. If all industrialised (Annex I) countries act, the leakage rate would be below 2%.

What about low-carbon technologies?

We also need to implement the right policies to encourage new breakthrough technologies and “strong and sustained” innovation that can help to reduce the cost of addressing climate change in the long-run. Carbon pricing will give investors the right financial incentives to develop and deploy low-carbon technologies.

The Kyoto Protocol in 1997 as is spurred investments and patents in renewable energy-related R&D (see chart below). A clear, long-term carbon price can also encourage greater efficiency in our use of energy and make alternatives to fossil fuels more cost-competitive, including renewable energies and nuclear power. Pricing is important, but must be complemented by regulations, standards, and targeted international assistance and collaboration to build capacity and knowledge. And we need to develop efficient markets and reduce trade barriers for low-carbon technologies.

Impact of a clear policy & price signal on innovation

How can we realise green growth?

As we exit the financial crisis, many countries are facing many social and economic challenges. At the OECD, we believe that it is possible to tackle climate change and grow the economy. Our bottom line is that green and growth are compatible. We can and must have them together.

In the next few years, we will be focusing our efforts on the potential of the green economy.

Our goal is to help governments build a green growth strategy. Today we are presenting some initial results of this work, with two reports.

Eco-Innovation in Industry: Enabling Green Growth: a key engine for green growth analyses gives examples of firms in the manufacturing and services sectors that have found innovative solutions to cut their costs while reducing GHG emissions.

Competitive Cities and Climate Change, notes that cities are critical to efforts to avert global climate change. Cities consume two-thirds of all energy and increasing urban sprawl is producing ever more CO2. Local governments in OECD countries are responsible for 70% of public spending on environmental protection and have put in place measures to reduce energy use such as road tolls and energy efficient building standards. They can and should be part of the solution.